On June 13, 2023, the Department of Labor (DOL) released its Spring regulatory agenda, including initiatives for the Employee Benefits Security Administration (EBSA), the subdivision responsible for employee benefit plans. According to the agenda, we can expect to see the following releases throughout the remainder of 2023.

Current Status of ESG and Proxy Voting Regulations

The Environmental, Social and Governance (ESG) and proxy voting rules for qualified retirement plans have been a controversial issue for Democrats and Republicans. As of March 2023, the (Biden) Department of Labor’s (DOL’s) 2022 revision of the (Trump) DOL regulation stands. Consequently, fund managers for ERISA plans may include ESG considerations in the investment process for plans, and plan fiduciaries may consider climate and ESG factors when exercising shareholder rights, such as in proxy voting. However, if such factors are considered, they must be based on issues that the fiduciary reasonably determines are relevant to a risk and return analysis.

As background, in March 2023, Congress passed a Congressional Review Act resolution that would have voided the (Biden) DOL’s 2022 ESG investment rule for retirement plans. President Biden, subsequently, vetoed that resolution; and Congress failed to over-ride his veto.

IRS Proposes Stricter Rules for Use of Plan Forfeitures

The IRS is calling for stricter guidelines on the use of plan forfeitures. On February 24, 2023, the IRS issued a proposed regulation regarding the use of forfeitures in defined benefit and defined contribution plans, including 401(k) plans. A public comment period on the proposed rule ended May 30, 2023, with a scheduled effective date for plan years beginning on or after January 1, 2024. However, plan sponsors may rely on the proposed rule immediately.

Under the proposed guidance as currently written, plan sponsors must use forfeitures incurred under a defined contribution (DC) plan within 12 months following the close of the plan year in which the forfeiture arises.  Further, such forfeitures may only be used to

1. Pay plan administrative expenses;
2. Reduce employer contributions under the plan; or
3. Increase benefits in other participants’ accounts in accordance with plan terms.

The regulation provides transition relief for forfeitures that arise in any plan year beginning before January 1, 2024. Those prior forfeitures will be treated as if they arose in the first plan year that begins on or after January 1, 2024. As a best practice, plan sponsors should consider reviewing the forfeiture provisions in their retirement plans for any necessary updates (e.g., to include all three acceptable usages so that all forfeitures can be used up within the required 12-month period).

IRS/DOL Changes Participant Count Rules for Form 5500 Audits

On February 24, 2023, the Department of Labor (DOL), IRS and Pension Benefits Guaranty Corporation (PBGC) published final Form 5500 forms and instructions applicable for plan years beginning on or after January 1, 2023. Simultaneously, the DOL issued final regulations in support of those forms and instructions. For more information, please see the final regulations for Annual Reporting and Disclosure.

The DOL requires sponsors of employee benefit plans subject to the annual Form 5500 series of returns and schedules to include an audit report from an independent qualified public accountant (IQPA). There is an exception to this requirement under DOL Reg. 2520.104-46 for “small plans” (i.e., those with fewer than 100 participants at the beginning of the plan year). The current rules, applicable for the 2022 Form 5500 filing, count individuals who are eligible to participate even if they have not elected to participate and whether they have an account in the plan or not.

For plan years beginning on or after January 1, 2023, participant count for the audit waiver will be based on the number of participants and beneficiaries with account balances at the beginning of the plan year. This change is intended to reduce the number of plans that need to have an audit, lower expenses for small plans and encourage more small employers to offer workplace retirement savings plans to their employees. Note that a plan may qualify for the audit waiver even if there are more than 100 participants under the “80 to 120 Participant Rule.” This rule states if the number of participants covered under the plan as of the beginning of the plan year is between 80 and 120, and a small plan annual report was filed for the prior year, the plan administrator may elect to continue to file as a small plan and, therefore, qualify for the audit waiver.

Key Considerations in Plan Lawsuits from the Seventh Circuit Court Decision

A recent Seventh Circuit Court decision, upon remand from the U.S. Supreme Court, articulated a set of considerations that could prove useful both for retirement plan plaintiffs contemplating lawsuits and plan fiduciaries wishing to avoid being sued. In January 2022, in Hughes v. Northwestern University, 142 S. Ct. 737 (2022), the Supreme Court vacated a 2020 Seventh Circuit decision for defendants in an ERISA prudence case involving two 403(b) plans, remanding the case to the Seventh Circuit for further consideration. On March 23, 2023, the Seventh Circuit handed down its decision in this litigation, siding with plaintiffs on the issues of recordkeeping fees and the selection of retail share classes. Key takeaways include the following items.

• Generally, quoting the court: “To plead a breach of the duty of prudence under ERISA, a plaintiff must plausibly allege fiduciary decisions outside a range of reasonableness.” That is probably the best one-sentence explanation of how to think about these issues.
• With respect to recordkeeping: While a fiduciary has no duty to “constantly solicit quotes for recordkeeping to comply with his duty of prudence with respect to plan expenses, … a fiduciary who fails to monitor the reasonableness of plan fees and fails to take action to mitigate excessive fees may violate the duty of prudence.”
• The use of retail share classes remains a significant vulnerability, and justifications for their use (e.g., higher quality services, attractiveness for small accounts, lack of availability of institutional share classes, or a better revenue sharing deal) may not be considered on a motion to dismiss.

Some consider Cash Balance Plans (CBPs) to be the next generation of qualified retirement plans. The size of the CBP market exceeds $1.3 trillion[1]  and is growing—up 60 percent in the last three years. Financial advisors should take note of this burgeoning movement that could increase their assets under management (AUM) and help business clients thrive both now and in retirement.

The reasons CBPs have caught the attention of successful businesses with the right make-up are many. Perhaps the main reason such business owners are interested in CBPs is to achieve higher contribution and tax deduction limits than those available in defined contribution (DC) plans such as 401(k)/profit sharing plans. Currently, there are approximately 23,000 CBPs with 10 million participants.[2]

CBPs are a type of DB plan structured, specifically, to meet the increasing contribution and equity objectives of professional service firms and other high earning individuals (e.g., attorneys and health practitioners). CBPs provide a tax-advantaged wealth accumulation strategy for owners of the right firms. Such plans typically supplement a firm’s existing 401(k)/profit sharing plan and provide all of the following advantages:

• Income deferral opportunities far beyond DC limits,
• Flexibility around who is covered and the contribution level,
• Tax-deductible contributions that are assets protected from creditors (unlike nonqualified deferred compensation plan assets),
• Lump sum payouts available for rollover or Roth Conversion and
• Transparency regarding the cost of each participant’s benefit.

“But don’t I have to be an actuary to sell CBPs?”

Let’s oust this myth right off the bat. Some financial advisors are intimidated by CBPs and avoid them, hiding behind the excuse, “I’m not an actuary—I can’t sell cash balance plans!” The truth is—advisors do not have to be actuaries to sell CBPs. They can partner with a firm or other entities for plan design, administration and actuarial services. The advisor’s role is to place the assets for CBPs on their usual wealth management platforms and get compensated just as they would with other assets under management. In fact, CBPs are easier for an advisor to service than 401(k) plans. For that reason, CBPs are a simple way to increase AUM without the usual DC plan headaches as long as the right team is assembled.

And 2023 is an unusually good year to prospect existing CBPs. Poor 2022 investment returns coupled with fixed rate interest crediting plan design has negatively impacted the contribution planning of plan sponsors. Existing CBP plan sponsors may be receptive to design changes—moving to a market return to stabilize plan contributions going forward.

How much more in contributions?

Total deductible contributions to a CBP can be two to four times more than contributions to a firm’s existing qualified DC plan. For 2023, DC plan contributions “max out” at $66,000 for participants under age 50, and $73,500 for participants age 50 and older. CBP contributions for an individual for 2023, potentially, based on a participant’s age and plan design, could be over $300,000—with a combined contribution total between a CBP and 401(k) plan nearing $400,000.

Because successful business owners often want to put away higher amounts than what a DC plan alone can provide, CBP plans are usually paired with a business’s existing DC plan—like a fine wine or favorite brew with a savory entree. Because a CBP is a type of DB plan, contributions can be in addition to and much larger than those allowed in DC plans. CBP contributions often are in addition to the amounts contributed to a business’s DC plan and, typically, vary based on a participant’s age, compensation level and/or employment group. The combination of plans can allow for much higher deductible contributions as the following table illustrates.

Assumes a 5% actuarial equivalence interest rate, 5% interest crediting rate adjustment, 5.5% lump sum conversion, discounting to the IRC Sec. 415 dollar limit from age 62, and maximum compensation for 2023 of $330,000

As displayed in this table, the maximum CBP contribution opportunity increases with age. Coupled with the maximum DC amounts from elective deferrals and profit sharing, the table shows the maximum deductible contribution opportunity available across all qualified retirement plans. While it may be appropriate for some key employees to have contributions at the highest levels, for others it may not. The flexibility built into the overall program is designed to meet the individual needs of each key employee.

Prime CBP Prospects

Firms that specialize in CBPs have found that the following industries are most likely to be interested in a CBP:

• Medical specialty groups (think radiologists or imaging centers, anesthesiologists, orthopedics, gastroenterologists, etc.)
• Law firms
• Capital investment firms

While those are the “big three,” other prime prospects, including the following, have shown interest:

• Engineering Groups
• Accounting Firms
• Architectural Firms 

Cash Balance Plan Designs

Cash balance plans are a type of DB pension plan that provides participants and beneficiaries with a promised retirement benefit. That means they carry with them a funding obligation that lies with the plan sponsor.  Although a CBP is a type of DB plan, it looks more like a DC plan. Increases and decreases in the value of a CBP’s investments do not directly affect the benefit amounts promised to participants. Thus, the investment risks and rewards on plan assets are borne by the employer.

Similar to a 401(k) plan, a CBP is expressed as an account balance (albeit hypothetical). In reality, CBP assets are managed in a pooled trust rather than an individual accounts. It is a DB plan that has been structured specifically to meet the increased contribution and equity objectives of professional service firms. Unlike a traditional DB plan, a CBP has the look and feel of the firm’s existing DC plan where each participant has an “account” that grows each year with contribution credits and interest credits.

In a typical CBP, a participant’s account is credited each year with a pay credit (such as five percent of compensation from the employer) and an interest credit, often referred to as the “interest crediting rate” or ICR. The ICR is important, as it can be a key driver of how much risk and volatility is present within a plan design. The first way a plan can credit interest is by using a fixed ICR. Prior to 2007, all cash balance plans used a fixed crediting rate. In this case, the plan simply adds a set percentage to a participant’s account at the end of each year. For example, if the balance at the beginning of the year is $10,000 and the ICR is a fixed 4%, the participant gets $400 added to his/her account at the end of the year, regardless of the performance of the underlying assets.

A fixed ICR can be frustrating to plan sponsors and service providers. When the promise does not align with the underlying rate of return, contributions become volatile (either much higher or much lower than anticipated) in order to get assets back in sync with promised account balances. Not a desirable outcome for plan sponsors. For this reason, most prefer to use an interest credit where participants’ accounts grow with actual trust returns. This is called a market rate return CBP. This minimizes the risk and volatility present in fixed-rate CBPs. Note: If actual returns are used, a participant must receive at least the promised contribution credits, or, put another way, a guaranteed zero percent return over the lifetime of participation in the plan. The ICR for newer CBPs (after 2006) is often tied to the underlying investment returns to minimize risk to the plan sponsor and create a promise that behaves similarly to the way a 401(k) plan operates.

Conclusion

There is every indication that CBPs are the next generation of qualified retirement plans, offering financial advisors a new way to increase AUM. CBPs are a type of DB plan structured, specifically, to meet the increasing contribution and equity objectives of professional service firms and other high earning individuals. Oftentimes, CPBs are paired with a 401(k)/profit sharing plan to maximize qualified contributions and tax deductions. Contrary to popular belief, advisors do not have to be actuaries to sell CBPs. Partnering with a firm or other entities for CBP design, administration and actuarial services allows financial advisors to do what they do best within their exiting wealth management platforms.

[1] DOL, “Private Pension Plan Bulletin, “October 2022

[2] Ibid.

Course Overview

Designing effective qualified retirement plans that meet a plan sponsor’s objectives has become somewhat of a lost art. The reasons are many:  Cookie-cutter designs are easier; safe harbor designs get media attention; the flexibility of modern plan documents are overlooked; and pre-approved plans can satisfy most sponsors’ needs.

 Learning Objectives

• Appreciate the importance of the plan design process;
• Comprehend why plan design has been de-emphasized;
• Identify strategies to help ascertain plan sponsor objectives;
• Understand how to meet plan sponsor objectives using a variety of plan features; and
• Apply specific plan design options to meet objectives.

In order to be awarded the full credit hours, you must be present for the entire session, registering your attendance and departure in the webinar and answering all polling questions.

Participants will earn 1.0 CPE credit.  Program is free.

Field of Study:  Specialized Knowledge

Additional Information:

Prerequisites:  3-5 years experience in the industry

Who should attend:  Financial Professionals and Accountants; others are welcome.

Advanced Preparations:  None

Program Level:  Intermediate

Delivery Method:  Group Internet Based

Refunds and Cancellations:   For more information regarding refund, complaint and program cancellation policies, please contact our offices at 218-828-4872 or email info@cecenterinc.com

Course Overview

The long-awaited and much anticipated “SECURE 2.0” is here. Join us as we provide an overview of the many aspects of the new retirement-related legislation know as SECURE 2.0. This bill makes significant changes to most aspects of the retirement environment including expanded contribution limits and credits, enhancements of SIMPLE IRA arrangements, emergency saving account options in 401(k), and matching of certain student loan payments. In addition, we’ll cover changes to excesses, corrections, RMD and rollover rules. Lastly, the timing, amendment and effective dates of key provisions will be discussed.

Learning Objectives

• Understand the new 401(k) features including emergency savings accounts, student loan payments, starter 401(k)s, required auto-enrollment features and increased credits and limitations
• Identify enhanced SIMPLE-IRA features, modifications to 457(b) eligibility requirements and ability to treat employer contributions as Roth amounts
• Recognize expanded rollover options, additional distribution penalty exemptions, RMD changes
• Summarize changes to MEP/PEP and Group of Plans rules
• Consider the timing and effective dates of the provisions and requirement amendments

In order to be awarded the full credit hours, you must be present for the entire session, registering your attendance and departure in the webinar and answering all polling questions.

Participants will earn 1.0 CPE credit. Program is free.

Field of Study: Specialized Knowledge

Additional Information:

Prerequisites: 3-5 years experience in the industry
Who should attend: Financial Professionals and Accountants; others are welcome.
Advanced Preparations: None
Program Level: Intermediate
Delivery Method: Group Internet Based

Refunds and Cancellations: For more information regarding refund, complaint and program cancellation policies, please contact our offices at 218-828-4872 or email info@cecenterinc.com

Continuing Education Center, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have the final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.NASBARegistry.org